Selling Your Inherited Property

Some people question if the money obtained from selling an inherited house is considered taxable income. To know if the sale of and inherited house is taxable, first you should know your basis in the property which means you need to know the fair market value of the house on the date of the deceased's death and/or the fair market value of the property on the alternate valuation date if the executor of the estate chooses to use the alternate valuation. See the Instructions for Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return.

To learn more about the fair market value of an inherited property on the date of the decedent’s death, contact the executor of the deceased’s estate. The executor's main function is to carry out the instructions and wishes of the deceased loved one. Another thing to consider is Congress passing a law that mandates an executor to provide a statement disclosing the fair market value of an inherited property to the person receiving it. Check What's New - Estate and Gift Tax for updates on regulations that have been set into motion for the application of the these laws.

If you or your wife/husband gave the property to the decedent within a year prior to the decedent's death, view Publication 551, Basis of Assets.

When the house is sold, make sure you report it on a Schedule D (Form 1040), Capital Gains and Losses, and on Form 8949, Sales and Other Dispositions of Capital Assets:

  • If you sell the property for more than the reported fair market value based on the criteria described above, it will be considered a taxable gain.

For instance, if you inherit your uncle's house and it was worth $300,000 when he died, and you later sold it for $350,000, you would subtract the stepped-up basis of the home ($300,000) from the sales price ($350,000) to determine the taxable gain ($50,000). As a result, you will be required to pay tax on the $50,000 gain. For information on how to report the sale on Schedule D, see Publication 550, Investment Income and Expenses.

What if you have to make improvements on the inherited property before you sell it? Simply put, it's a write-off. You can deduct those expenses to reduce your tax bill, and potentially increase your profits at the same time.

Just an FYI, you can be penalized if you use a basis exceeding the property’s final value for the purpose of reducing or minimizing federal estate tax when you report the sale of the inherited property. Make sure what you are reporting is accurate.

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